By Sruthi Shankar

(Reuters) -European stocks tumbled on Thursday, on course for their biggest percentage drop in five weeks, as investors fled riskier assets including equities and commodities after the U.S. Federal Reserve signalled a slower pace of interest rate cuts next year.

The pan-European STOXX 600 index was down 1% by 0839 GMT, with all the major subsectors in the red.

U.S. stocks plunged on Wednesday, with the major indexes posting their biggest daily decline in months, after the Fed cut rates as expected, but Chair Jerome Powell said more reductions in borrowing costs now hinge on further progress in lowering stubbornly high inflation.

Futures pointed to a mild rebound when U.S. stocks open on Thursday. [.N]

“Wall Street’s reaction underscores the Fed’s delicate balancing act as it tightens its outlook on easing, forcing markets to recalibrate their rate expectations,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.

“Investors should see this as a healthy spot of profit taking rather than an end to the party, after what’s been a fantastic run for markets since the U.S. election.”

U.S. and European government bond yields spiked in response to the Fed announcement, while prices of oil and base metals fell against a stronger dollar. [O/R] [MET/L]

Rate-sensitive technology stocks in Europe came under heavy selling pressure, and were down 1.9%, after megacap giants suffered big losses overnight on Wall Street.

Chip stocks including ASML, Infineon Technologies and STMicroelectronics fell between 3.0% and 3.6%.

A volatility gauge for euro zone stocks jumped to its highest in two weeks.

The UK’s blue-chip FTSE 100 dropped 0.9%, swept up in a broader market selloff, ahead of the Bank of England’s rate decision at 1200 GMT.

Traders widely expect the British central bank to keep interest rates on hold at 4.75% as persistent inflation pressures limit it to a gradual approach towards cutting borrowing costs.

“The MPC will very likely repeat its rate guidance for ‘a gradual approach to removing policy restraint’, which probably means one 25 bps cut per quarter,” Unicredit analysts said.

“In our view, the BoE will need to cut rates faster next year, with one 25 bps cut per meeting in Q1 2025, as we expect the deterioration in the private-sector labour market to become more visible.”

SoftwareOne Holding jumped 8.7% after the Swiss technology firm announced a deal to buy Crayon Group that valued its Norwegian competitor at around $1.34 billion. Crayon’s shares fell 6.5%.

(Reporting by Sruthi Shankar in Bengaluru; Editing by Sonia Cheema and Shounak Dasgupta)